Warning before Investing in share market
Investing in share market needs deep analysis of companies performance and research. Part time investing in share market can not be done because you should invest with your own research not by watching tv or from any whatsapp group recommendation because it is your hard earned money.
before investment the standard steps one should follow are
1) fundamental analysis (very important for long term investment)
2) technical analysis (very important for short term investment or trading)
3) News ( important for both long term & short term perspective)
Reading news is not that much tedious as fundamental or technical analysis.
If you want to invest in stock market with continuing your current job its to difficult and more risk.
However mutual fund is great alternative for you. mutual fund is nothing but a fund collected by investors which the fund manager invest in the basket of stocks instead of one stock so that risk is reduced.
Financial terms to analyse share market
One can not judge company's future growth by seeing it's current share price. Current share price can be over valued or under valued means company's actual growth can be more or less than its share price.
Suppose you want to buy a steel company's share but which to buy company A or company B. Let's say A's share price is 100 rs and B's share price is 500 rs.
So investor may think that possibility of share price growth of company A is much more than B. But these data are not enough to say this. Following are the required data to evaluate a company or compare the companies.
P/E ratio (price to earning ratio) - It is ratio of current price of one share of company to earning per share. P/E ratio is studied in two formats.
1. Forward P/E ratio - It is the ratio of today's share price to the earning per share over the next 12 months
2. Trailing P/E ratio - It is the ratio of present share price to the present earning per share.
P/B ratio - It is ratio of price of one share of company to the book price.
Mcap/GDP - Ratio - It is the ratio of total Market cap of all listed companies of country to the GDP ratio of country.
Debt to Equity ratio - It is the ratio of total debt fund of any company to their owned fund (equity). Optimal ratio considered is 2:1. If you notice here more debt is ok compared to equity, this is because interest need to be paid on these debt is tax deductible so cost of funding is less. But this does not mean high debt is good. Zero debt is also considered to be good. For a investor's point of view it should be low.
Return on Capital Employed (RoCE) - It is ratio of EBIT (Earning Before Interest & Tax) to the total capital employed (debt+equity).
Charting the Market
Chartists use bar charts, candlestick, or point and figure charts to look for patterns which may indicate future price movements.
They also analyze volume and other psychological indicators (breadth, % of bulls vs % of bears, put/call ratio, etc.).Strict chartists don't care about fundamentals at all.
Basic Technical Tools
1.Trend Lines
2. Moving Averages
3. Price Patterns
4. Indicators
5. Cycles
What is Trend Lines?
A trend ine is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.
An uptrend line has a positive slope and is formed by connecting two of more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. A nising price combined with increasing demand is very bulish and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, the uptrend is considered sold and intact. A break below the uptrend line indicates that nel-demand has weakened and a change in trend could be imminent
A downtrend ine has a negative slope and is formed by connecting two or more high points The second high must be lower than the first for the line fo have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish and shows the strong resolve of the sellers. As long as prices remain below the downtrend ine, the downtrend is considered sold and intact. A break above the downtrend line indicates that net-supply is decreasing and a change of trend could be imminent.
There is no specific method which will work for stock market always. All technical parameters have exception, they will not be useful for stocks. Due to this reason case study is very important.
For example let's analyse covid 19 situation. Stock market in India rebound from corona pandemic in very short period of time. It is because of following reasons.
1. As all big businesses faced very low demand so their production cost translated into share market investment.
2. Zero brokerage services like Zerodha, upstox etc. took advantage by offering trading with very low brokerage fees.
3.Retail investors number increased as many people got break in job and many lost their job so they started trading and investment in share market to make it as source of income.
4.Recovery of economy from pandemic is the main reason that stock market got recovered.
5. Increase in FDI and FII is the reason that stock market recovered in very short span of time.
Types of investment alternatives
1) Financial assets
a. Marketable :- Investor can manage and control the investment, less liquid in nature
Eg- all the market traded securities
b. Non marketable:- No management but have right, highly liquid
Eg- bank deposits, post office deposits, NSC etc.
c. Direct:- Investor manage their own portfolio, return in terms of dividend and interest will goes to Investor directly
Eg- stock market
d. Indirect:- Investor does not manage their portfolio but somebody else, return in terms of dividend and interest will goes to Investor indirectly
Eg- mutual funds
2) Real assets
Classification of financial markets :
Based on Nature of claims :
Equity market
Debt market (Govt and corporate debt market)
Based on Maturity of claims :
Money market Short term
Capital market Long term
Based on Seasoning of claims :
Primary market (new market like IPO)
Secondary market (only transmission takes place)
Based on Timing of delivery :
Cash or spot market
Forward or Future market
Based on Organisational structure :
Exchange traded market
Over the counter marke
Investment alternatives in various markets:
Stock market: stocks
Debt market: Long term government securities, debentures, corporate bonds
Money market: money market mutual fund, treasury bills, commercial papers
Derivatives market: options, futures, swaps
How equity capital is raised in primary market ?
Public issue: selling the securities first time
Right issue: issuing rights to the existing shareholders
Private placement: sale of securities to selected financial institutions, mutual funds etc.
Preferential allotment: It is for selective investors and from listed companies.value is generally higher than IPOs.
Operation of secondary market :
Trading
Open outcry system :- in this system buyers bid and seller gives offering and negotiation takes place.
Screen based system :- buyers and sellers place their orders on the computer.
Settlement
Account period settlement system
Carry forward mechanism
Rolling settlement system (modern system T+2)
Short selling:- first sell then buy
Trading margin:- It is the portion of the securities investor want to buy given by broker.
We will understand whole concept and types of mutual funds in next blog. Thanks